New Permanent Establishment Rules for Oil and Gas Industry in Mexico

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On 18 August 2017, the Convention between the United Mexican States and the Argentine Republic to Avoid Double Taxation and Prevent Fiscal Evasion (Mexico-Argentina Tax Treaty), as well as the Protocol to the Convention between the United Mexican States and the Kingdom of Spain to Avoid Double Taxation (Mexico-Spain Tax Treaty) were published in the Federal Official Gazette.

The Protocol to the Mexico-Spain Tax Treaty includes the modification of income tax withholding rates to be applied upon obtaining of revenue from dividends, interest, capital gains, among other concepts.

Moreover, Article 22 was added to the Mexico-Spain Tax Treaty, which provides that a permanent establishment shall be triggered when a resident of a contracting state carries out in the other contracting state the exploration, production, refining, processing, transportation, distribution, storage or trading of hydrocarbons, provided that such activities are carried out for a period or periods that together exceed 30 days in any given period of 12 months. Also, the Tax Treaty between Mexico and Argentina includes an identical provision in Article 21 for the undertaking of activities related to the oil and gas industry.

The above provisions are consistent with the permanent establishment provisions applicable to hydrocarbon exploration and extraction activities contained in Article 64 of the Hydrocarbon Revenue Law (LISH), which establishes that a permanent establishment shall be created when a non-resident undertakes the activities referred to in the Hydrocarbons Law, to the extent that such activities are carried out for a period that exceeds 30 days in any given 12 month period.

Please note that Mexico has executed additional tax treaties which include similar drilling rig clauses, and it is expected that the Mexican Government will renegotiate them in order to provide coherence with the concept of permanent establishment set forth in the LISH.

In Baker McKenzie we are committed to share valuable information with our clients and friends. If you would like any further advice regarding the new rules related with the above, as well as to resolve any other inquiry you may have, please do not hesitate to contact us.

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